CAP: New Revenues from “Sin Taxes” Erased by Tax Cuts; Long-Term Funding Gap Widening

(Tulsa, OK) – The three new “sin taxes” that Oklahoma voters approved in the fall of 2004 to boost funding for education and health care have generated less revenue than was initially anticipated, according to a new report released today by Community Action Project (CAP). Moreover, the revenue gains from the new funding streams have been nullified by revenue losses from tax cuts enacted in recent years.

“We feel it is important for policymakers and the public to have a more complete and accurate picture of the impact of the lottery, gaming compacts and increased tobacco taxes that were approved three years ago,” said David Blatt, the report’s author and CAP’s Director of Public Policy. “In particular, we believe that this an opportunity to examine these new funding streams in the context of other revenue decisions of recent years.”

The report shows that the state collected $241 million in the last fiscal year from the lottery, gaming compacts, and increased tobacco taxes. At the same time, the major tax cuts approved between 2004-06 decreased last year’s state revenues by some $333 million. Over time, this gap will widen to the point that by FY 2010, the lost revenue from tax cuts will more than double the additional revenues from lottery, gaming and tobacco.

“The net impact of increasing sin taxes while cutting the income tax is to make the tax system less able to fund essential public services and achieve the collective goals Oklahomans care about in the areas of education, health care and public infrastructure,” stated Blatt. “Voters may be more inclined to support “sin taxes” than broad-based revenue increases, but this is not a sustainable or responsible approach to funding services. With structural budget deficits looming on the horizon, it will be up to policymakers, advocates and ordinary citizens to propose and support better policy choices if we are to avert a major fiscal train wreck.”

In addition to weakening the adequacy of the revenue system, swapping sin taxes for income taxes puts more of the responsibility for funding public services on those who are less well off, since lower-income households spend a greater share of their income on tobacco and gambling than upper-income households.

Among the report’s main findings are that:

* The lottery generated $71.4 million in FY ’08, while gaming compacts brought in $56.8 million;

* While lottery and gaming revenues did generate new funds for education, the share of state appropriations for the major education agencies has fallen in recent years. Common education, in particular, has received a declining share of total state appropriations in recent sessions, as legislators have shifted General Revenue dollars to other priorities;

* Collections from the new tobacco taxes totaled $112.4 million in FY ’07, some $38 million below what was projected when the measure was approved. Most of the shortfall is attributable to a shift of tribal tobacco sales to the lowest cigarette stamp rate of 5.75 cents.

Community Action Project is a Tulsa-based anti-poverty agency that conducts policy analysis and advocacy on behalf of low-to-moderate income Oklahomans. The full report, titled “Three Years Later: Gambling and Tobacco Taxes Provide Small Boost to Revenues but Fail to Close Long-Term Funding Gap”, along with 1-page factsheets on each of the new revenue sources is available on CAP’s website at:

Related: Minimal budget growth seen for fiscal year 2009

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